Christopher Joye, Australian Financial Review, 13 July 2018
On the subject of looking after stakeholders, when hedge fund boss Rob Luciano of VGI Partners asked me whether I would sit on the board of his listed investment company (LIC), I said I would consider it only if VGI absorbed 100 per cent of the circa 3 per cent sales costs that typically force LICs to trade at a discount to their net tangible assets (NTA) on day one. This had never been done and, after some contemplation, VGI shocked the market with a model that insulated investors from these costs.
Magellan's Hamish Douglas later said he happily plagiarised VGI's innovation and then improved on it through his own LIC. (Magellan paid for all the distribution costs upfront rather than repaying them over years as VGI does.)
Another global equity manager, PM Capital, looks to have broken new ground with a landmark LIC that will be issued out of its existing ASX-listed vehicle, the PM Capital Global Opportunities Fund Limited (ASX:PGF). Like Magellan, PM Capital will pay for all the offer costs upfront.
A core gripe with LICs is that they frequently trade at a discount or premium to their actual NTA, which means that investors' realised experience is different to the stocks held by the LIC. This is because the number of units or shares in the LIC is fixed in contrast to an "open" exchange traded fund (ETF) where the price of the ETF is held close to NTA by issuing new units at NTA for inflows and redeeming units at NTA for outflows.
To address this problem, PM Capital created "portfolio tracking exchangeable redeemable securities" (PTrackERS) that allow investors to exchange PTrackERS for PGF shares in seven years, or fully redeem them at PGF's NTA at that time. This has two important consequences: it means that for the first time investors can exit a LIC at NTA after a (recommended) seven-year holding period or they can roll into PGF shares with full capital gains tax relief if they want to retain this exposure.
The reason fund managers love LICs is because they provide permanent capital as opposed to an unlisted unit trust or ETF where investors can reduce assets to zero by redeeming if they are unhappy with performance.
This is not possible with a LIC because the shares always remain outstanding – you have to find another person to buy them from you if you want out, and this often involves selling at a substantial discount to NTA. By permitting redemptions after seven years at NTA, PM Capital's solution mitigates this concern. It is also a quantum leap forward in LIC governance by enabling investors to punish a manager for poor performance.
I rate PM Capital's founder Paul Moore, who since 1998 has doubled the annualised returns of the MSCI World Net Total Return Index in Aussie dollars and ranks number one in his peer group over the nine years to December 2017. He's a contrarian, high-conviction manager who has a strong track record through multiple cycles, which cannot be said of all the LICs out there. The one downside is that this comes with higher volatility, although nobody ever generated superior returns from diversifying.
The author is a portfolio manager with Coolabah Capital Investments, which invests in fixed-income securities including those discussed by this column.